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Why is Cash Flow Management Important for Small Businesses?
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Read this guest blog by Paul Atkinson, of Esker Partner, CoCredo, to learn why cash flow management is so important for SMEs, and how to better manage your small business cash flow.
Cash flow management is crucial for small and medium-sized businesses because it directly affects their capacity to stay operational and grow over time.
Cash flow is the amount of cash coming into, and out of, your company, during a given period. Ideally, your organisation has a consistent supply of incoming cash or a positive cash flow. If you’re losing more money than you’re bringing in, you have negative cash flow, which is a significant indicator that your enterprise could be in serious trouble.
This article covers cash flow management, its importance, and tips to help businesses manage it successfully.
What is cash flow management?
Cash flow refers to the movement of money in or out of a business, organisation, or individual’s bank account. It represents the net increase or decrease in cash and cash equivalents during a specific period.
Cash flow management measures the amount of cash that comes in and goes out of a business over a set period and the methods used to control that flow to keep a business solvent. Negative cash flow means more money is going out of the business than coming in, making it difficult to pay bills, make purchases, or invest in growth opportunities. On the other hand, positive cash flow means cash is available to use as necessary.
Working capital refers to having accessible finances to pay all your responsibilities, and it allows firms to know exactly how much money they have at their disposal. The method and activities required to track your cash flow are called ‘management’.
Why is cash flow essential for your small businesses?
Cash flow management is essential to a business’s financial reporting and planning. It ensures the balance between money coming into the business, making sure it isn’t exceeded by money leaving the company. A positive cash flow allows for paying bills, investing in growth, responding to emergencies, and building a safety net. A small business can survive and grow more with good cash flow.
Cash flow might indicate your company’s health and long-term performance more accurately than revenue or profit. Why? Because you cannot continue day-to-day business operations without a positive cash stream.
How can you better manage your small business cash?
Managing cash flow is critical to the running of a business. Regularly confirming that cash is flowing through the company and leaving your accounts balanced positively enables vital decisions on spending.
1. Maintaining liquidity: As a small business owner, you must ensure sufficient funds to cover your expenses, such as paying suppliers, staff, and bills, to run your business smoothly. Effectively managing your cash flow is vital to avoid any financial hiccups and fulfil your financial responsibilities without any obstacles.
2. Planning for the future: Planning for your financial future is crucial. Forecasting your cash inflows and outflows is an effective way to do this. By anticipating any potential financial gaps, you can proactively take preventative measures to avoid any issues before they arise. Don’t wait until it’s too late – start planning for your financial success today!
3. Managing growth: Cash flow is critical for growing small businesses. To achieve this, it is essential to carefully time cash inflows and outflows while keeping a close eye on inventory levels and expenses. By doing so, businesses can effectively fund their expansion plans and ensure continued success.
4. Improving financial health: Small businesses can improve their financial health by managing their cash flow effectively. This can be achieved by reducing the risk of default, improving creditworthiness, and increasing profitability. As a result, they can have greater access to financing and lower borrowing costs over time.
5. Making informed decisions: Make informed decisions about investments, financing, and other financial matters by understanding their cash flow. With a clear understanding of their available cash, they can determine whether they have enough funds to pursue growth opportunities or need to wait until they have more money. This knowledge is crucial in helping them make sound business decisions.
Tips for the management of cash flow
Cash flow management is critical for the success of any business, regardless of its size or industry. Here are some tips to help you effectively manage your cash flow:
1. Create a cash flow forecast: Creating a cash flow forecast is essential in anticipating your cash inflows and outflows during a specific period. By analysing past data, market trends, and other relevant factors, you can generate a forecast that can assist you in making sound financial decisions.
2. Ensure bookkeeping is up to date: Accurate and up-to-date cash flow reports rely heavily on the information obtained from bookkeeping. By standardising bookkeeping and making it a regular habit, businesses can ensure that the information used to manage cash flow is reliable and make informed decisions based on it – a significant first step towards producing high-quality reports.
3. Streamline your payment processes: Make sure your payment processes are streamlined to avoid delays in customer payments. Whether you’re an SME owner with no accounting experience or a finance specialist, plenty of cash flow software is available to make your processes more efficient. As well as offering improved accuracy, using app or internet-based tools makes it simple for you and your staff to log on and send invoices from any location. Why not use small business accounting software to automate invoicing and payment processing?
4. Generate regular statements for good visibility: As a business changes month to month, so does the cash flow. For example, cash flow in seasonal months may differ from cash flow in months predicted to have low sales. Regular statements help build up a complete cash flow history for the business. This process helps analyse information and predict future finances to inform business planning.
In summary
Small businesses must manage their cash flow carefully to maintain liquidity, plan for the future, manage growth and improve their financial health. Failing to do so can lead to serious financial problems and even bankruptcy.
You need to be able to spot early warning signs, such as a recent drop in a customer’s credit score. Acting fast can reduce the chances of repercussions, such as a lower credit score for your business or damage to your reputation if you can’t meet your own payments.
CoCredo offers many UK and Ireland Company Credit reports that provide thorough, trustworthy, and critical business credit check data. These reports give you the assurance you need to safeguard your business against any financial risks that may be harmful.
CoCredo are an Esker Partner